HMRC has lately been turning its spotlight on commercial property investors and, in particular, situations involving the non-payment of VAT where there is a transfer of a going concern (TOGC).
Generally, sellers of commercial investment properties must not charge VAT on the sale price of a property if the transaction is the sale of a going concern. The most usual example of this for investors is where a letting business (renting out to a tenant) is being operated by the seller.
This is helpful for buyers of commercial property because they then do not have to find the extra 20 per cent VAT on top of the purchase price. Nor do they then have to pay Stamp Duty Land Tax on the VAT element, because the VAT is not being charged.
HMRC had historically interpreted this legislation to mean that when an “interest in land” (generally the freehold or a lease) is being transferred to a buyer, then, in order for that transfer to qualify as a TOGC, it must be the same “interest” or asset as that used by the seller in his business.
The interpretation meant that if a freeholder lets out a unit on a short term commercial lease and later sells the freehold unit with the lease remaining in place, then in order for the transfer to be a TOGC it must be the freehold which is passed over.
If that freeholder were instead to grant a long lease at a premium (price) for a term of say 125 years, again with the shorter lease remaining in place, then the same “interest” or asset which is used in the freeholder’s business is not transferred.
Thus, until now, granting a new lease instead of transferring the existing asset in its entirety would not have been treated as a TOGC. However, following a recent Tribunal case, HMRC has been forced to revise its interpretation.
The case of Robinson Family Ltd v HMRC involved a sale of an interest in part of a 125 year lease of a site. The freehold was owned by Belfast Harbour Commissioners and the 125 year headlease in question was owned by Robinson Family Limited.
The terms of the 125 year headlease were that the site could only be divided up by the grant of subleases. RFL could not, therefore, assign parts of its existing lease and had to grant subleases instead.
In due course, RFL granted long-term subleases of the various different units on the site to various prospective purchasers. The subleases were for terms of 125 years less three days – so almost, but not quite, the full length of the Headlease term. The tail-end of the headlease which was not sublet, and remained with RFL, is known as the “reversion”.
In respect of one of the Units, it was claimed that the grant of that particular sublease was a TOGC. Prior to the grant of the sublease, HMRC had accepted that there was evidence to demonstrate that a letting business had been undertaken at that Unit and, further that, such letting business would continue after the “sale”.
It seems that HMRC might have assumed at the time that the transfer of the business would have been part of an assignment of the Head lease or part thereof and not the grant of the sublease. Indeed, the Tribunal said that at the point in time at which HMRC accepted that there was a property letting business, HMRC “obviously did not appreciate that the proposed method of documenting that sale was by way of the creation of a sub-lease”.
Following completion of the transaction, HMRC did not treat the grant of the 125 year lease as a TOGC, on the basis that RFL did not assign the full term of its lease of that particular unit to the purchaser and, instead, granted a sublease. The basis of its argument was that the retention of the 3 day reversion was enough to mean that there was no TOGC.
However, the First Tier Tribunal ruled that: “In such situations, one must look to the substance of the transaction and, where the transferee is, in effect, carrying on exactly the same business as the transferor, then prima facie the TOGC Provisions should apply….. We find that in this particular case that is exactly what occurred….”
As the evidence supported the fact that there was a business which had been transferred, albeit by the grant of a sublease, HMRC did not succeed in its argument.
As a result HMRC issued the following revised interpretation:
For a valid TOGC, any interest in land and property retained by the seller has to be shown to be small enough not to disturb the substance of the transaction.
- HMRC will accept that a reversion retained by the transferor is sufficiently small for TOGC treatment to be capable of applying if the value of the interest retained is no more than 1 per cent of the value of the property immediately before the transfer (disregarding any mortgage or charge).
- Where more than one property is transferred at one time, this test should be applied on a property-by-property basis rather than for the entire portfolio.
- If the interest retained by the transferor represents more than 1 per cent of the value of the property, HMRC will regard that as strongly indicative that the transaction is too complex to be a TOGC.
Carey Jacobs, a Commercial Property Partner with Palmers, said: “The issues relating to TOGCs are complex and it is important to ensure that the correct processes are followed if your intention is for a property sale to be treated as a TOGC.
“HMRC has recently set up a taskforce targeting the sale of commercial investment property treated as a TOGC and appears to be concentrating its efforts on the dates of completion as everything needs to have been put in place by then in order to qualify for tax relief.
“In order to stay compliant and avoid paying more tax on a property transfer than is necessary it is important to obtain expert professional advice.” For more information, please contact us.